Question

________ exist when a firm's costs rise as a function of its volume of production.

A) Economies of scale
B) Economies of scope
C) Diseconomies of scale
D) Learning curve effects

Answer 1

Diseconomies of scale occur when the increased output leads to higher long-run average costs for a firm, which can be due to various issues related to excessive size. This is in contrast to economies of scale, where costs decrease as output increases.

Step-by-step explanation:

Diseconomies of scale occur when a firm's long-run average cost of producing output increases as the total output increases. This contrasts with economies of scale, where the long-run average cost decreases as the output goes up. Diseconomies of scale can arise due to several factors, including managerial inefficiencies, increased communication costs, or logistical issues that can occur when a firm becomes too large.

Economic profit is the difference between the total revenues and total costs (both explicit and implicit costs). Explicit costs are out-of-pocket expenses such as salaries, rent, and materials. Implicit costs are the opportunity costs of resources the firm already owns. It's important for a firm to consider these factors to ensure that increasing the scale of production will not lead to increased average costs, hence negating the potential benefits of economies of scale.